Charlie Munger’s Speech that “no one gets”
A dive into a remarkable thought exercise.
There’s a speech Charlie gave which he claims has massive relevance. However, he mentions that no one really understood what the talk was about in real time. Even after being printed and read slowly, most people miss the main point. Against the very latent possibility of myself misunderstanding Charlie’s message, I’ll try to break it down.
Practical Thought About Practical Thought? (1996)
Charlie was actively seeking for better methods of thought. I believe his intention was to explain how he fundamentally thought about difficult problems. Munger had learned five “ultrasimple general notions” that are very useful for solving problems. Briefly listed below, they include:
Simplify problems answering no-brainer questions first.
Numerical fluency is a key feature for effective problem solving.
Think problems backwards. Some are too difficult to be solved with linear, forward, thinking.
Elementary academic wisdom and a multidisciplinary approach are crucial inputs for analysis.
Consider lollapalooza effects. Big things are generally caused by multiple powerful forces acting in their favor.
To illustrate this, he posits a tough problem he’ll solve employing these principles:
Imagine it is 1884 and a citizen, named Glotz, wants to start a business in the non-alcoholic beverages industry and remain only in that industry forever. Glotz is willing to invest $2M for half the equity, while the remaining half would be destined to the Glotz foundation, and wants the company to be called Coca-Cola. The goal is for the business to be worth $2 trillion 150 years later, in 2034 dollars. Glotz will onboard the person who can pitch the best plan of action.
Simplification
The first step is to think about the problem as a big composition of questions, or little issues. One must separate the easy from tough ones, and rapidly get rid of the former, which otherwise emit noise. Concerning important questions that could be easily answered, Munger found:
If it’s meant to become a $2 trillion dollar business, it cannot be done with a generic beverage. A truly valuable trademark must be built.
The world cannot be dominated at once. No enterprise counts with the resources to successfully launch globally. Therefore, Coca-Cola needs to start in Atlanta and slowly, but surely, expand.
The product itself must have universal appeal. Everyone must like it elementary academic wisdom, covered later, will be used to achieve this tough goal.
Numerical Fluency
Before deciding whether or not to proceed with the venture, one must carefully assess its feasibility. If reaching $2 trillion in market value requires an impossible mix of elements, no matter how good the proposal is, the project will fail. To analyze this, Charlie laid down the following assumptions under which Coca Cola could be worth $2 trillion, even after paying dividends:
It’s reasonable to assume there will be 8bn consumers (although I’m personally skeptic of being able to come up with this one).
Every person is mostly composed of water and has to ingest 64 ounces of water per day, or eight 8-ounce servings.
New flavored beverages may take ¼ of the total market.
Coca Cola, if cultivated properly, could own half of that market.
That way, Coke would sell 2.92 trillion 8-ounce servings in 2034.
If Coca Cola earns $4 cents per serving, it will earn $117bn in 2034.
If by 2034 Coca Cola is still growing at decent rates, it’s likely that the market values it at $2 trillion or more.
Out of the foregoing premises, the profit target per serving is the most doubtful one. To determine whether it is realistic or not, Charlie plays it out and roughly figures what could happen with the purchasing power of beverage consumers:
The dollar will depreciate, as all currencies historically have.
Consumers’ real purchasing power will go up.
Their “proclivity to inexpensively improve his experience while ingesting water will go up considerably faster.”
Technology will make Coca-Cola’s costs much lower in real terms.
These factors will probably make the profit target a reality if the product truly has universal appeal.
Multidisciplinarity and Lollapalooza Effects
Although one could presume that these ultrasimple notions can be applied linearly, in steps, it doesn’t seem to be the correct approach. It seems to me that one must think about all principles at all times. Potential for their successful application depends on the problem at hand. The big concern to now sort through is how to create a product of universal appeal.
In order to solve this, Charlie utilizes, mostly, multidisciplinary knowledge and lollapalooza effects. Universal appeal, leading to controlling one half of this huge market, is by itself a titanic task. It’s therefore in the partnership’s best interests to leverage as many resources as possible. A waterfall of different forces leading to universal appeal must be constructed.
Understanding psychology makes us rapidly conclude that we are aiming at “creating and maintaining conditioned reflexes.” The trademark, namely Coca-Cola, will be the stimuli, and the reaction we want to aim for is the purchase and ingestion of the liquid. Diving a bit further, there are two methods for doing this. Since our goal is to maximize effectiveness, we’ll utilize both:
Operant conditioning.
Classical/Pavlovian conditioning.
Solving operant conditioning requires maximizing consumers’ rewards for ingesting Coca-Cola and minimizing the chances of another company taking advantage of the reflex we create. For rewards, four factors can be considered. Striving for a lollapalooza effect, we will again use all four:
Food value found in calories.
Darwinian evolution made our consumption stimuli to derive from flavor and aroma.
Caffeine or sugar for stimulus.
A cooling effect for when a person is hot or a warming effect in the obverse case.
Back to Simplification
In the last one, it’s rather the cooling effect that we want, for it provides more room for consumption. When people are hot, their proclivity to drink liquid increases dramatically, whereas when it’s cold this element is somewhat capped. Secondly, wanting lollapalooza effects, we can easily conclude that including both sugar and caffeine is the way to go.
To avoid competitors taking advantage of the reflexes that we create, we will make sure our product is available everywhere. Building a large distribution network is key for this occurring. A competing product will not pose a threat to the fulfillment of the habit we create as long as it is not tried as a solution.
Back to Pavlovian Conditioning (Psychology)
Pavlovian conditioning offers a big repertoire of insights regarding Man’s mind configuration. The first factor to consider is the powerful effect coming from our mere association tendency. When something is exhibited along another thing that we like, the likeability is somewhat spread. Our mind will start associating the product with the things we like and create a mixed feeling that will lead to people’s direct wanting of Coca-Cola. We’ll employ as much capital as needed in sound marketing.
Done well and over an extended period of time, we’ll own half the market. Thereafter, considering the advantages scale brings on distribution, we’ll be able to more profitably hold this half of the market. Moreover, if we remember Cialdini’s work, social proof will start acting in our favor, which will become an everlasting flywheel, unless we do something stupid.
Further juice can be extracted from man’s mere association tendency:
Flavor, texture and aroma will be selected so that they maximize experienced pleasure. Coca-Cola will then be associated with that pleasant sensation.
An expensive-sounding name must be picked, considering human nature. Coca-Cola, instead of a generic brand name, is perfect.
To give a further sense of exclusivity, we’ll make the product look like wine or champagne.
In order to make it more difficult for competitors, the flavor that Coca-Cola has cannot be standard. After we achieve perfection, the formula must remain secret, which will in turn drive an aura of secrecy around the brand that’s perfect for marketing. We must get the brand as well-known as possible before the flavor can be perfectly copied.
Logistics and Distribution
Coca-Cola could be either sold as syrup to restaurants or within containers as a carbonated water product. Again, aiming for lollapalooza results, we’ll do both. Moreover, to avoid the cost of shipping water, we’ll allow for a network of bottlers. But they will be subcontractors, not vendees of the syrup. This is crucial to maximize profit.
Inversion
A successful implementation of any plan carries the need to think about what could destroy it. What must we avoid to succeed?
From Darwinian evolution we get that we must avoid the aftertaste effect, which physiologically reduces the desire for further consumption. Trial and error can help us develop a flavor that minimizes aftertaste.
We must avoid the trademark name being utilized by others, any of both words. If it occurs, we must act.
From Psychology and Religion we get that we must avoid the envy that will come from our success. The best recipe for such a thing was given by Aristotle, ‘plainly deserve what you get.’ The reasonable price and harmless pleasure provided by our good product should counteract it.
After the flavor and aroma are well implanted, we must avoid sudden taste changes. This could cause very harmful effects, for our customers will continue seeking the already-created solution to their reflex. Changing it on a massive scale and suddenly is the perfect moment for a competitor to steal a large part of our market.
Final Remark
Charlie finishes by saying that almost no academic nor business school dean would give the “same simple answer” he gave. And that’s terrible. No one really understands where Coca-Cola’s success came from and, by that token, they cannot explain it correctly to others. This was notorious with Coca-Cola’s executives who tried to do the sudden change in taste, not knowing it was one of the only things that could destroy one of the most valuable brands in the world. Elementary Psychology notions would have helped them rapidly conclude otherwise. Extreme failure in both reaches are due to profound ignorance.
Personal Conclusion
Despite the fact that I completely agree with Munger and the correctness of his approach, I understand that getting multidisciplinary fluency is not easy. There is not reason for it being so. But one shouldn’t be surprised when observing that most people don’t choose the tough road. Because, furthermore, a priori it’s not even obvious that it’s the correct road. It is to some but not its full extent. The trade off with time is unclear, considering the unknown returns.
The reason why “no one gets this talk” is, I suspect, because of its hiding-in-plain-sight nature. If you zoom out, you clearly see how this is a holistic analysis, leveraging multiple chains of thought and very different angles. At the same time, all little problems are being attacked with the same 5 notions, which is the key to the speech. Learning how to apply these notions routinely, which by itself implies familiarizing oneself with a broad base of knowledge, is what may lead to a better thinking process.
However, covering such wide terrain while positing a uniquely distinguishable problem, namely, how to turn $2M into $2Tn in 150 years, causes a shift in focus. People will tend to remember the practical problem, for it is easier and then they stop looking. But after the looking is that the whole picture presents itself.